Tax Treatment

As with ESA’s, contributions to a 529 Plan are not deductible for federal tax purposes. However, earnings are tax-deferred. And if used for qualified education expenses, accumulated funds can be withdrawn tax free.

One feature that some 529 Plans have which all ESA’s don’t are state tax benefits. Some state plans offer an upfront deduction on contributions, while others make withdrawals exempt from state taxes in addition to the federal tax exemption.

Contribution Limits And Requirements

Each state has their own 529 Plan, but investment in a state’s plan doesn’t restrict you to using the funds for a school in that state. You can live in Texas, invest in a California plan, and send your beneficiary to college in New York.

With the inflation rate for college rising faster than the normal inflation rate, some people want to save more than the $2,000 annual limit for ESA’s. The 529 Plan has a much larger limit. You can contribute up to the limit set by the state offering the plan, which is usually over $300,000 per beneficiary.

And unlike ESA’s, there are no income limitations for those who want to contribute to a 529 Plan.

Qualified Withdrawals

Unlike ESA’s, in which beneficiaries must use the assets by the time they reach age 30, there is no age limit on the use of 529 Plan assets.

But although ESA funds can be used for elementary, secondary, and post secondary school expenses, funds in a 529 Plan can only be used at a post secondary school.

And like the ESA, earnings in a 529 Plan that aren’t used for qualified expenses will be subject to income tax and a 10% penalty.

Available Investments

While ESA’s are more flexible with the type of investments you can choose, 529 Plans are more restrictive. Funds can only be invested in portfolios established by the plan.

Each portfolio will have different investment objectives, but there will usually be an option for a portfolio whose asset allocation becomes more conservative as the beneficiary reaches college age. In addition to this, you’re allowed to change the investment strategy once a year.

Additional Benefits

Not only is the 529 Plan a great savings tool for college – another benefit is that it can be used to reduce the size of your estate. Contributions of up to $13,000 per year can be made to the 529 Plan without paying a gift tax. Once completed, this money is removed from your estate.

And since you can treat a contribution as being made over a five-year period for gift tax purposes, you can contribute a lump sum of $65,000 in the first year and still avoid gift tax. With this method, the money and its future appreciation will be removed from your estate faster.

Closing Thoughts

So because of the larger contribution limits, state tax benefits, and ability to remove assets from your estate, I think the 529 Plan has the advantage over the Coverdell ESA.

What do you think? Do you have a 529 Plan? Do you like them better than Coverdell ESA’s?

This post was included in the Carnival of Personal Finance during the week of July 6, 2010. Check out My Journey To Millions’ for a variety of great articles!

Will

A will is a legal document that gives the maker the chance to control the distribution of his or her property. Generally, a will is valid if the maker is at least 18 years old and is of “sound mind,” which basically means that you’re mentally capable of making a will.

If you were to die without a will, your state will direct how your property will be distributed using what is known as its intestacy laws. Intestacy is just a fancy word that refers to the state of dying without a will. The problem with intestacy laws are that they are not likely to distribute property the way you wish. For instance, in a family with a spouse and four children, the surviving spouse’s share may only be one-fifth of the estate.

Intestacy may also require the selection of an administrator to handle the affairs of the estate. This administrator would need to provide a surety bond, which would cover any financial losses to the estate due to any improper acts by the administrator. Since this bond is not free, it increases the cost of settling the estate. It is the court, and not the decedent (the person who died), who will select the administrator. The potential problem with this is that the administrator who is selected may not be the person that the decedent wanted to handle the estate.

Power Of Attorney

Under certain circumstances, you may need a trusted person to make decisions for you regarding your property. This may be because you’re traveling, or because you’re physically or mentally unable to do so yourself. A power of attorney is the document that will allow that trusted person to act in your place. Examples of situations in which a power of attorney is used are to handle your banking transactions, buying and selling property for you, or filing your tax returns. An important point to remember in selecting a power of attorney is to make sure he or she is a trusted person.

A power of attorney can be broad or specific. The broadest power you can give to another is a general power of appointment. This grants the holder of the power the right to do anything that you could’ve done, including making gifts to the him or herself or paying his or her creditors. A limited power of appointment may be as narrow as giving the holder the power to pay your bills. It can also be as broad as giving the holder the power to do anything except appoint assets to themselves, their creditors, or their heirs.

You can revoke these powers, and they cease at your death. One thing to keep in mind is that if a person holds a general power of appointment, those assets over which the holder has power may be included in his or her gross estate, if the holder dies before the giver.

Durable Power Of Attorney For Health Care

This specific power of attorney eliminates the need to petition a court to appoint a guardian to make health care decisions for you in the event you become incapacitated, such as if you become unconscious, mentally incompetent, or otherwise are unable to make medical decisions for yourself. This provides continuity in the management of your affairs. The durable feature means the power survives your disability of incapacity. This type of power may be granted as springing upon a disability or incapacity, or granted effective immediately. You can also revoke this power.

Living Will

A living will states your last wishes regarding sustainment of life. It establishes medical situations in which you no longer want life-sustaining treatment. A living will only covers a small range of situations, and applies usually only to terminal patients.

Personal Instruction Letter

This letter details your wishes regarding the disposition of tangible possessions such as household goods, the disposition of your body, and funeral arrangements. It may also contain information regarding the location of important personal documents, safe deposit boxes, outstanding loans, and other financial information. Since it exists separately from a will, it avoids cluttering the will with small details.

Do you have any of these documents now? If not, will you consider creating them?